Family Security Law Group, APC write about estate planning, wills, trusts, durable power of attorney, title and property agreements, special trusts, probate, trust administration and more!

Tax

05/10/2017

“Consumer watchdogs are fearful that some of the nation’s most vulnerable taxpayers will be harassed and that criminals will take advantage of the system by phoning people and impersonating I.R.S. collectors.”

Starting in April, the IRS began using private debt collection agencies to collect past-due taxes. The new program could be confusing to seniors, who are vulnerable to scams.

Congress passed legislation in December 2015 that approved the IRS’s contracting with private debt collectors to collect certain debts. These private collection agencies can work on accounts where the taxpayer owes money and the IRS isn’t actively working on the account. That could be because the account is older or the IRS does not have resources to keep pursuing the debt.

The IRS would never harass consumers over the phone. But this new program allows private debt collectors to contact taxpayers by phone. This may make it harder to know if a scammer is targeting the taxpayer.

Both in 1996 and 2006, the IRS tried to use collection agencies. However, both times, the programs failed, with the most recent attempt costing millions more than it took in. In addition, the program created thousands of complaints—one of which was the horror story about an older couple who received more than 150 phone calls in less than a month. Some changes were made.

The IRS will inform taxpayers by mail if it is turning their collection issue over to a private debt collector. The debt collector must also send a written notice, once it receives the taxpayer's information, and collection agencies are required to comply with all debt collection laws. These laws prevent debt collectors from harassing consumers. More information is found on the IRS website.

The IRS has contracted with these four debt collection companies:

Conserve in Fairport, New York

Pioneer in Horseheads, New York

Performant in Livermore, California

CBE Group in Cedar Falls, Iowa

In order to avoid scams, seniors should know that private collection agencies will only request payments to be made online at IRS.gov or by check. The checks should be made payable to the U.S. Treasury and sent directly to the IRS. They don’t go to the private collection agency. The collection agency won’t ask for payment on a prepaid debit card or gift card.

11/16/2016

“What we often overlook is that a retirement account doesn't have to be blessed by the IRS to be used for retirement.”

Almost every American adult contributes to at least one retirement account that allows them a current income tax deduction or a tax-deferred account contribution (IRA's, 401k's, 403b's, 457b's and defined benefit plans). And as you know, when you start to take distributions from these accounts, you pay income taxes at ordinary income tax rates. Other retirement accounts, like Roth IRAs, don't allow a current deduction, but they’re tax free when you are ready to begin taking distributions at age 59½. A good-size Roth is a wise estate planning move. Since the IRS does not make you take withdrawals from your Roth over your lifetime, you can leave a tax-free "gift" to your heirs if you don’t spend it all during your lifetime.

As Physician’s Money Digest says in “10 Reasons You Need a Taxable Investment Account,” taxable retirement accounts are ignored because we’re so focused on IRS-approved retirement accounts. But you might think about supplementing your savings with a taxable retirement account. This can be a regular, old-school investment portfolio that’s not linked to any government regulations and that you’re building for retirement.

Here are some of the benefits of a taxable retirement account:

You have complete freedom over investments;

You’ve got total flexibility over your account;

You can use your portfolio as collateral for a loan;

You don't have to start withdrawing your taxable account when you turn 70 1/2;

You have "basis" in your account, which means when you withdraw money, you pay taxes only on the growth;

You only pay a maximum tax rate of 20% on long-term capital gains and qualified dividends (from stock held for at least one year);

You can write off capital losses in the account;

You can use income from the account to offset an unused investment interest deduction;

Your heirs will enjoy a stepped-up basis if they inherit the account from you; and

Your heirs don't have to start taking withdrawals from the account when they inherit it from you.

But be aware that taxable accounts aren’t protected in the event of a lawsuit, and you get basis instead of a tax deduction. That should be examined in light of your goals and insurance protection.

This doesn’t mean having a taxable account is your #1 priority when saving for retirement, but it should be up on the list based on your finances and the integration of tax planning with your short- and long-term financial goals. It can be a good filler for some of the gaps in your tax and retirement planning strategy.

But this doesn’t mean you get to ignore how that money will be distributed—there are options available. The insurance company can cut a check, but you can have the insurer hold on to all or some of the funds and distribute them at a later date or in periodic distributions. If the money is held by the insurer, it will continue to earn interest—and that interest is taxable.

Another option is to transfer those funds to a trust that could control the proceeds of the policy based on the stipulations you set when creating it. However, remember that trust planning can get complicated if you establish “incidents of ownership” in the policy, in other words, if you are controlling the policy in some way. For example, such “incidents” include borrowing against it, using it as collateral or assigning it in a contract. If that happens, the proceeds of the policy might be considered a part of your estate and be subject to estate taxes when you die. Those estate taxes may be delayed if your spouse is the beneficiary, but taxes may be due when he or she passes away.

Also, remember that while you can state in your will that the proceeds of a life insurance policy should go to one of your beneficiaries, only the named beneficiary of the policy gets the funds. When your intentions change, you must contact the life insurance company to update your beneficiary designation. You should also update any 401(k)s or IRAs.

Talk with your estate planning lawyer to be certain that your life insurance policies work in concert with the rest of your estate plan to give your family protection and to help avoid unintended and potentially unpleasant financial consequences.

08/02/2016

“While the words ‘gift’ and ‘taxes’ don’t seem like they belong in the same sentence, they do—and the gift tax can definitely matter to you.”

Forbes’ recent article, “Why The Gift Tax Matters So Much to You,” reminds us that certain wealth transfers are excluded from gift taxes. You can currently give $14,000 per year or $28,000 per year as a couple to an individual or separately to as many individuals as you wish without paying taxes on any of the gifts. In addition, the recipient doesn’t owe any taxes on the gift received. But what some folks don’t understand is this: the $14,000 limit applies to filing a gift tax return—not the total amount you can give each year.

In addition to the $14,0o00 annual exclusion, there’s also a lifetime exemption from gift taxes—now at $5.45 million (or $10.9 million per couple). That means you can make total gifts of up to $5.45 million before you have to pay gift taxes. Any remaining exemption can be used as an exemption from estate taxes when needed.

The reason to file a Form 709, Gift Tax Return, is for you and the IRS to have an accounting of the amount of your lifetime exemption you’ve used. Plus, some gifts are also not considered taxable—like gifts of up to $14,000 to as many different people as you want, charitable gifts, gifts for education expenses and gifts for medical expenses.

While you are at it, you can make contributions to a Section 529 tuition plan and exclude up to the annual $14,000 limit, or you can give up to $70,000 in one year and use up five years’ worth of the exclusion. But if you do this, you can’t make another gift to that individual for the next four years.

Remember: if you want to help someone with tuition fees or medical bills, send the money directly to the institution or party that provided those services—such as the college or hospital. Don’t give the gift to the friend or relative you want to help, or the gift will be deemed taxable income.

Make sure that you get advice from a qualified estate planning attorney.

06/15/2016

"Leave your job in the year you turn 55 or older, and Uncle Sam will cut you some slack on the early-withdrawal penalty."

The rule for tapping a 401(k) without incurring the 10% early-withdrawal penalty requires that you are at least age 59½, but there's an exception. If you leave your employer in the year you turn 55 or older, there's no penalty. Even so, you'll still owe tax on the withdrawal. As a result, a $10,000 payout at a 25% tax rate will cost you $2,500. However, there's no $1,000 early-withdrawal penalty tacked on to this.

It doesn't matter how you separate from service. In fact, retiring, being laid-off, or even termination will spare you the penalty. Provided you're 55 by the end of the year you leave the job, the rule applies, says the Kiplinger's article, "When You Can Tap a 401(k) Early With No Penalty."

If you were to leave your job in January and turn 55 in December, the 401(k) payouts anytime during the year are penalty-free. However, if you retire in December and turn 55 the next January, you'd be hit with the penalty until age 59½.

Reaching age 55 or older in the year you leave is the trigger, not just your 55th birthday. So if you were to leave a job at age 50, you couldn't tap that 401(k) penalty-free until you reach age 59½. But if you leave an employer at age 55 to work for another company and then leave the second position at age 57, you could withdraw from both 401(k)s penalty-free. You left both companies in the year you turned 55 or older.

This exception may come in handy for some early retirees who need to use the funds in their 401(k) for living expenses. But remember: this exception from the penalty is lost if you rollover your 401(k) to an IRA. Once the money goes into the IRA, the earliest age for penalty-free withdrawals is back to age 59½.

An IRA, in contrast, has more investment options than a 401(k). One could split the 401(k) for a better result. For example, if you were to retire at 55 with $1 million in your 401(k), and you want to withdraw $50,000 annually for the next five years, you could leave $250,000 in the 401(k) to take advantage of the penalty exception and rollover $750,000 into an IRA to take advantage of other investment choices.

Ask your benefits manager for the details and rules of your 401(k), as there are some plans that don't allow partial withdrawals or periodic distributions.

05/18/2016

"Which former Chief Justice's simple one-page last will and testament was initially posthumously mocked by commenters for not explicitly dealing with estate taxes?"

Chief Justice Warren Burger died in 1995 and after the terms of the will were uncovered, its terms incurred ridicule for his failure to save his heirs taxes.

But the Chief had the last laugh. His lawyer responded that Burger's will, when given effect along with the terms of his previously deceased wife's will, created maximum tax savings.

Above the Law's April 26 post, "Think Supreme Court Justices Can't Estate Plan? Wrong," explained that when Chief Burger died, many who read his glowing obituaries almost didn't recognize the man they described. That's because, despite his many virtues, there were plenty of people whose overwhelming impression of Burger was of a man who was "pompous" and "arrogant." And for those people, it came as no surprise when many thought Burger had a fool for a client: himself.

The one-page "Last Will and Testament" that Burger personally typed was thought to be inadequate, especially for the nation's top jurist. It was believed that his poor estate planning would cost Burger's son and daughter more than $450,000 in taxes.

But the Chicago Tribune, after getting more facts, found the Chief to be a model for sensible estate planning. Burger and his wife, who died a year before he passed, did indeed consult with estate planning lawyers and took steps to minimize their tax liability. This was evident from Elvera Burger's will.

While a handwritten will that hasn't been witnessed may or may not be accepted in your state, the truth of the matter is that you don't want your heirs to have to find out at probate. Without a valid will, state laws will dictate where your property goes. The biggest risk with a self-drafted will is that the state may declare it invalid because of some technical issue.

05/13/2016

"How much was the King of Pop's name and image worth when he died? The estate says $2,105, but the IRS insists its value is more than $434 million."

Since his death in 2009 at age 50, Jackson has experienced a commercial rebirth—thanks to the sharp executors who have managed his assets. The documentary This Is It grossed $261 million. A Cirque du Soleil tribute show sells out in Las Vegas. Plus, money is made from albums, video games, and other lucrative memorials.

But now the IRS wants its share, arguing that the value of Jackson's name and image upon death amounted to more than $434 million. What did the estate say was the valuation? Just $2,105.

The Hollywood Reporter says in its recent article, "Michael Jackson Estate Faces Billion-Dollar Tax Court Battle," that with interest and penalties, lawyers estimate the case—which is scheduled for trial in 2017—could be worth more than $1 billion. Some tax specialists even wonder if there could be criminal tax evasion charges. The outcome could affect celebrity estate planning.

What matters most for tax purposes is the value of Jackson's name and likeness at the time of his death—not in the present day, after his executors have worked their magic.

Adam Streisand, a probate attorney who has worked with celebrity estates such as those of Ray Charles, Marlon Brando and Marilyn Monroe, thinks the IRS won't to be able to point to other celebrities' post-death earnings as part of the valuation process. But then again, this is the first time the IRS is pursuing estate taxes for name and likeness.

Ultimately, it's hard to know how something like the "Jim Croce effect"—referring to the singer who died in an airplane crash in 1973 and standing for the proposition that many entertainers are worth more dead than alive—will factor. A judge's valuation could center on what licensors were willing to pay to be associated with Jackson, not what he actually received in sponsorship and merchandise deals.

A California law gives celebrities posthumous rights to their names and images, which has been a boon to the spouses and children of these famous people. However, there have been ramifications—as are seen in the Jackson case. This statute codifies the concept that a celebrity's name and image is a property right like a house.

05/11/2016

"The death of the music icon sets off a complicated process to value his estate."

The death of the musician Prince has started the clock on when the IRS will take a big chunk out of the star's estate. But no one really knows how big that bite will be or the actual size of the pie.

For those involved with Prince's estate, calculating just how big Uncle Sam's bite will be may be a real challenge. Some say it's next to impossible and might also fuel a lengthy feud between the government and the estate, as more than half the estate's value could be forfeited in taxes.

Prince's fortune was about $300 million, and the divide between how the IRS and his estate view the present value of future royalties could be extremely significant. The death of a popular artist can mean increased valuation. Experts say that death has an impact on the artist's body of work.

The IRS will say his death will blow the royalties off the charts. However, the estate's attorneys will oppose such a move.

That's why the estate of the late Michael Jackson is currently locked in a court battle with the IRS. The government valued Jackson's name and image upon death at more than $434 million. However, his estate's estimate was a tad bit lower: $2,015.

The IRS has learned its lesson from the case of Elvis Presley's estate. It didn't anticipate the phenomenon of the king's increasingly popular catalog after he died in 1977.

Elvis generated $55 million in 2015 alone, which was second only to Michael Jackson's $115 million, according to Forbes' list of top-earning dead celebrities. Now the IRS is taking this potential revenue stream much more seriously.

And, as a New York Times article indicates, a "trove of Prince's recordings remains unreleased," so the potential value from those works is unknown.

Prince's estate has 15 months to file a federal estate tax return (nine months plus a six-month extension), and the estimated federal estate tax is due at the nine-month date. Note that Prince wasn't married at death, so there's no chance of a spouse taking advantage of the unlimited marital deduction, which would pass the estate to the spouse tax-free.

The federal government assesses a 40% estate tax on estate values over $5.45 million. Minnesota, Prince's state of residence, is one of 20 or so states that also have a state estate tax. The Gopher State's top rate is 16%—that will add up to a 56% tax for Prince's estate total when including the federal rate.

If the IRS says the tax amount paid by the estate was undervalued after getting the tax return, it will propose a valuation increase, which is open to negotiation.

If they can't agree, they go to court.

If any of your assets are difficult to value, we suggest that we meet to try and avoid what is happening with Prince’s estate. Contact us at Family Security Law Group, APC to discuss.

04/22/2016

"In the event of your untimely demise, the government slaps an estate tax or death tax on your business and reduces the worth of your business by 50%."

The Huffington Post says in "5 Things Estate Planning Can Do for You and Your Business," that co-owners, family members, and ex-spouses can suddenly come out of nowhere to claim some of your successful business. Your company is reduced to nothing in less than a year. However, proper estate planning protects your business in case there are unexpected circumstances.

Estate planning can be used by business owners to avoid unfortunate events and to prevent seizure and depreciation of the business assets. This can decrease the stress and hassles that occur immediately after you die. Here are some good estate planning ideas to help your business.

More options for your business. Solid estate planning gives you the option of a buy-sell agreement. If your business has one or more co-owners, this agreement ensures that upon the death of any owner, the interest of the deceased is automatically purchased by the other owner(s). The beneficiaries of the deceased owner, such as the spouse, children, or other family member won't unintentionally become owners. This strategy can alleviate some stress in an already stressful situation, immediately after the death of an owner or part owner of a business.

Guarantee the longevity of your business. Sole proprietors, small businesses, and big companies all want to pass their enterprises to future generations to keep their legacies alive. Estate planning can ensure the longevity of your business with a business transition plan.

Minimize taxes. A business owner can transfer business assets to his or her children and retain a source of income by establishing a grantor retained annuity trust (GRAT). This will help make sure that when business assets grow over time, the appreciation in equity and value of your business will not be hit with huge tax bills.

Succession planning for your business. Good estate planning will ensure that your business is preserved and operating the way you'd want it to run. Any issues in the transfer of management and ownership when you're gone are conducted effectively with wise estate planning.

Plan for the future. A good succession plan for your business could take several years to create, so start early. This can help you see the bigger picture for your business and present new ideas.

If a failure to include the cash in the inventory of the estate assets keeps the estate below the reporting threshold and no return was filed, the unpaid tax on the cash will accrue interest. Plus, the estate and executor may be subject to penalties for nonpayment, as well as facing civil and criminal penalties if this failure to file is deemed fraudulent.

Unlike cases where a return is filed, there's no statute of limitations where assets are not reported; the assets haven't been disclosed, and the tax authorities haven't been given an opportunity to review and evaluate reported information.

Even if the failure to file is an honest mistake, if the estate is audited, the executor can be personally liable for the unpaid tax, interest and penalties because he has distributed the estate's assets.

If you properly prepared but filed the return late, if one was never filed or if one was filed but the cash not reported, taking care of this should give a person peace of mind that it's likely to be a pretty minor tax cost.

Talk with a knowledgeable and reputable estate planning tax attorney at Family Security Law Group, APC about this situation.